Want to invest in NVIDIA stock? Here’s an equally good alternative.
With tech giants’ stocks exceptionally volatile, an alternative route may be wise for investors.
Nvidia (NASDAQ:NVDA) shares briefly surpassed Microsoft and Apple last month to become the world’s most valuable company. But that glory was short-lived, as the chipmaker lost 8% of its value the following day.
Indeed, the AI gold rush, massive earnings, 10-for-1 split, and doubling of dividends have seen NVIDIA stock up almost 160% YTD. But it cannot be ignored that the tech giant lost over $500 billion in market cap over three trading sessions right after it took down Microsoft, a brutal display of volatility.
For those who want to invest in NVIDIA stock but are hesitant after the recent onslaught, other options may be the smartest path forward.
Nvidia’s fickle personality
Nvidia’s stock soared nearly 200% on Tuesday, June 18, making it the world’s most valuable company. But in stark contrast, the following week the company suffered one of the largest three-day losses in stock market history.
This volatility in NVIDIA stock is expected to continue, with experts arguing that the stock’s steep rise leaves it vulnerable to additional profit taking.
The $500 billion selloff in June raised concerns that NVIDIA was overvalued, with several analysts, including Deutsche Bank financial research strategist Jim Reid, warning of “signs of overexuberance” in AI stocks.
Increased competition is another factor that could drive volatility in NVIDIA’s stock. Patrick Moorhead, founder and CEO of Moor Insights & Strategy, told Yahoo Finance that NVIDIA is competing not only with “merchant silicon vendors” like AMD and Intel, but also with Amazon’s AWS, Microsoft’s Azure, and Google’s “homegrown vendors.”
Another blowback for Silicon Valley chipmakers could be a prosecution by French antitrust regulators. Reuters, citing sources familiar with the matter, recently reported that French antitrust regulators are considering filing charges against chipmakers for anticompetitive practices.
If the charges are true, NVIDIA could face financial penalties and may be required to change its business practices. Financial penalties may not be a major concern, but if NVIDIA is required to make operational changes, it could impact NVIDIA’s competitive position and market strategy.
So what is the alternative?
Investing in high-growth stocks like NVIDIA carries some risk. If you can afford it, you can invest directly in stocks. But if not, there are other ways to get into the AI stock craze, the most important of which is to choose an index fund.
Index funds are passive investments designed to mimic the stock market (not outperform). Investors who are not bullish but are willing to bet on the future of AI can still benefit from NVIDIA’s meteoric rise by investing in a technology-focused index fund, such as the NASDAQ 100 Tracking Fund.
For example, the Invesco QQQ Trust tracks the Nasdaq-100 Index, which tracks the 100 largest stocks listed on NASDAQ. It is a growth-focused index fund with a heavy weighting in the technology sector. NVIDIA is the third-largest holding in the Invesco QQQ Trust (7.56%), followed by Microsoft (8.51) and Apple (8.19%).
The Invesco QQQ Trust has returned about 170% over the past five years, or about 22% annually. The fund has outperformed the S&P 500 in the past and will likely outperform it in the future. Over the past 20 years, the Invesco QQQ Trust has returned 14.6% annually, compared to 10.3% for the S&P 500 over the same period.
Investing through these funds comes with fees. For example, the Invesco QQQ Trust has an expense ratio of 0.2%, meaning you pay $20 per year for every $10,000 you invest. Still, index funds are a good choice for risk-tolerant investors who want to reduce their exposure to volatile investments like Nvidia stock.
